Morning in Arizona

The Headline Animator

Friday, March 03, 2017

Stocks Mostly Flat, Yellen Hints at Possibility of March Hike

Charles Schwab: On the Market

Posted: 3/3/2017 4:15 PM ET

Stocks Mostly Flat, Yellen Hints at Possibility of March Hike

U.S. stocks oscillated around the unchanged mark to close mostly flat
as the markets eyed the afternoon speech from Fed Chairwoman Janet
Yellen, where she suggested a March rate hike could be a possibility.
Treasury yields were nearly unchanged despite domestic services sector
growth unexpectedly accelerating to the highest pace since October 2015.
The U.S. dollar fell; giving back some of its recent rally, while gold
and crude oil prices were higher.

The Dow Jones Industrial Average (DJIA) ticked nearly 3 points higher to
21,006, the S&P 500 Index added 1 point to 2,383, and the Nasdaq
Composite increased 10 points (0.2%) to 5,871. In moderately-heavy
volume, 825 million shares were traded on the NYSE and 1.8 billion
shares changed hands on the Nasdaq. WTI crude oil ticked $0.72 higher to
$53.33 per barrel and wholesale gasoline added $0.01 to $1.65 per
gallon. Elsewhere, the Bloomberg gold spot price ticked $0.50 higher to
$1,234.75 per ounce, and the Dollar Index—a comparison of the U.S.
dollar to six major world currencies—was 0.8% lower at 101.39. Markets
were higher for the week, as the DJIA increased 0.9%, the S&P 500
Index advanced 0.7%, and the Nasdaq Composite ticked 0.4% higher.

The February Institute for Supply Management (ISM) non-Manufacturing Index (chart)
surprisingly rose to 57.6—the highest since October 2015—from January's
unrevised 56.5 level, where the Bloomberg forecast called for it to
remain. A reading above 50 denotes expansion. New orders improved to
61.2 and employment ticked higher to 55.2, while prices declined to
57.7. The ISM said comments from respondents continued to be mixed, with
some uncertainty, however, the majority indicated a positive outlook on
business conditions and the overall economy.

The final Markit U.S. Services PMI Index was revised to 53.8 in
February from the preliminary 53.9 level, versus estimates of a 54.0
reading, and compared to the 55.6 figure posted in January. However, a
reading above 50 depicts expansion. The release is independent and
differs from ISM's report, as it has less historic value and Markit
weights its index components differently.

As noted in the latest Schwab Market Perspective: Not So Fast!,
economic data has continued to beat expectations, but the number of
upside surprises may start to level off. That doesn't mean things are
getting worse, just that expectations are catching up with the
improvements in the data, which could have a dampening impact on
investor enthusiasm in the near term. However, ultimately, we believe
fiscal stimulus is coming—although perhaps later than anticipated—and
the bull market in U.S. stocks will continue. Read more at www.schwab.com/marketinsight.

Treasuries were nearly unchanged, with the yields on the 2-year and
10-year notes, as well as the 30-year bond flat at 1.31%, 2.48% and
3.07%, respectively. Bond yields paused from a recent rally, while the
U.S. dollar pulled back from a run as of late and the stock markets were
flat after yesterday's retreat from all-time highs.

With expectations of a possible Fed rate hike later this month jumping
this week in the wake of continued strong economic data and commentary
from Central Bank members, the markets focused on Federal Reserve
Chairwoman Janet Yellen's speech on the economic outlook, where she
noted that the economy has exhibited remarkable resilience and is close
to meeting the Fed's goals of maximum employment and price stability.
These comments appeared to preserve elevated rate hike
expectations. For analysis of the Fed, check out Schwab's Chief Fixed
Income Strategist, Kathy Jones' article, What would a shake-up at the Fed mean for bond investors? at www.schwab.com/onbonds, and follow Kathy on Twitter: @kathyjones.
Political risk remains in focus following President Trump's first
speech in front of Congress this week as discussed by Schwab's Vice
President of Legislative and Regulatory Affairs, Michael T. Townsend in
his latest article, Presidential Reset: What Does Trump's Speech Mean for His Agenda?, at www.schwab.com/insights.

European equities finished mixed, with financials gaining ground as bond
yields in the region and the U.S. extend rallies, bolstered by boosted
expectations of a possible rate hike in the U.S. later this month. The
markets awaited today's speech from U.S. Fed Chairwoman Janet Yellen
today. Also, eurozone political risk continued to fester as a key French
Presidential election looms, as discussed by Schwab's Chief Global
Investment Strategist Jeffrey Kleintop, CFA, and Vice President of
Trading and Derivatives, Randy Frederick in the video, Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights. Also, be sure to check out Jeff's article, Five Reasons to Stay Invested Despite Heightened Uncertaintyat www.schwab.com/oninternational. Follow Jeff on Twitter: @jeffreykleintop.
In economic news, Markit's final Eurozone Composite PMI Index—a gauge
of business activity in both the services and manufacturing sectors—was
unrevised at 56.0 for February, matching expectations and above the 54.4
level posted in January. A reading above 50 denotes expansion. Markit's
U.K. Composite PMI Index showed although activity decelerated, it
remained in expansion territory. The euro was higher and the British
pound dipped versus the U.S. dollar.

Stocks in Asia finished mostly lower on the heels of the drop in the
U.S. markets from all-time highs, amid the backdrop of heightened
expectations of a possible rate hike in the nation later this month,
while the markets awaited today's speech from U.S. Fed Chair Janet
Yellen. Japanese equities declined, with the yen recovering from a
recent slide and as data showed household spending dropped more than
expected in January, though the nation's core consumer price inflation
unexpectedly rose. Chinese stock markets traded lower, continuing to
pare recent rallies that have been bolstered by upbeat economic data.
The favorable data continued today as a read on key services sector
activity showed growth accelerated last month. Australian securities
dropped and South Korean listings fell, while Indian equities finished
flat. Schwab's Director of International Research, Michelle Gibley, CFA,
provides some timely analysis of global investing in her articles, Currency Hedging: 5 Things You Need to Know and Emerging Markets: Why They Deserve a Place in Your Portfolioat www.schwab.com/oninternational, and be sure to check out our release, Why Your Portfolio Needs International Stocks—Despite 2017 Risks at www.schwab.com/insights.

Stocks continue to rally as data counters political risk

U.S. stocks extended a rally on the week, registering fresh all-time
highs. They joined a global equity market push to the upside that was
bolstered by a plethora of upbeat global business activity reports, as
favorable data out of China and Europe was met with a jump in the U.S. ISM Manufacturing Index to
the highest level since August 2014. Expectations of a Fed rate hike
later this month rose, which helped send the U.S. dollar higher, revived
a rally in Treasury yields and helped boost the financial sector. Along
with the economic optimism, President Donald Trump's dialed-down tone
in his first address to Congress, although lacking details of his
reflationary policy plans, appeared to be met positively by the markets.

With earnings season all but in the books and Fedspeak going quiet ahead
of its March 14-15 meeting, all eyes will likely focus on next week's
U.S. economic calendar, which will deliver reads on factory orders, the trade balance and 4Q nonfarm productivity and unit labor costs. However, the docket will be headlined by Friday's key nonfarm payroll report for February.

As noted in the latest Schwab Market Perspective: "Phenomenal" Expectations,
U.S. stock indexes broke to the upside, on better economic data but
also heightened expectations of tax and regulatory reform. The bar is
now set higher for policy action to support the rhetoric, setting up the
possibility for a market pullback and/or a pickup in volatility. The
economic picture continues to look good, but inflation is heating up,
which has put a March rate hike by the Federal Reserve firmly on the
table. An earnings growth recovery has helped fuel a global rally, but
there are risks that expectations and valuations have gotten a bit
extended. Read more at www.schwab.com/marketinsight.

International reports due out next week that deserve a mention include: Australia—retail sales and the Reserve Bank of Australia's monetary policy decision. China—trade balance and inflation reports. Japan—trade balance and 4Q GDP. Eurozone—investor
confidence, 4Q GDP and the European Central Bank monetary policy
decision, along with German factory orders and trade balance. U.K.—industrial and manufacturing production, trade balance and inflation forecast.

Disclaimer: The material appearing on this site is based on data and information from sources we believe to be accurate and reliable. However, the material is not guaranteed as to accuracy nor does it purport to be complete. Opinions and projections, both our own and those of others, reflect views as of dates indicated and are subject to change without notice. The contributions and opinions of others do not necessarily reflect the views of Marvin Clark, Monsoon Wealth Management, or Fixed Income Daily. Nothing appearing on this site should be considered a recommendation to buy or to sell any security or related financial instrument. Investors should discuss any investment with their personal investment counsel. Past performance does not guarantee future results.